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Ratio Analysis
Liquidity Ratios= Denotes the firms capacity to pay its short term Obligations on time
Current Ratio
Current Assets
Current Liabilities
Higher the current ratio
better the liquidity Ideal
ratio generally 2:1 (2
assets & 1 Liabilities)
Quick Ratio/Acid Test
Ratio
Current Assets-Inventory-Prepaid Expenses
Current Liabilities
More stringent measure of
Liquidity than current
ratio. Generally 1:1 is
considered good ratio
Cash Ratio Cash + Marketable securities
Current Liabilities
Represents the extent to
which cash & near cash
marketable securities are
sufficient to meet Current
Liabilities
Solvency Ratio= Measures the relationship between Owners fund & Borrowed Funds. Long term
solvency depends upon following factors: Appropriate debt-equity mix to raise long term funds,
adequacy of resources to meet its long term funds requirement Also Known as Capital Structure
Ratio
Debt-Equity ratio Debt (long term Debt)
Equity (Share holders fund)
Standard ratio is 2:1
Judges the long term
financial position &
Soundness of long term
financial policies
Debt to assets Ratio Debt (long term Debt)
Net Assets
Net assets available to
company to pay its debt
Interest Coverage ratio Profit before Interest & Tax
Interest Obligations on Long term debt
Indicates How many times
the profit covers fixed
interest
Proprietary ratio Net Worth or Share holders funds
Total Tangible Assets
Represents proportion of
Tangible assets financed
through owners funds
TOL to Net Worth Total Outside Liabilities
Net Worth
Indicates the adequacy of
firms equity in making
payment of outside
liabilities
Turnover Ratios= Also known as Efficiency ratios & indicates the efficiency with which assets
are utilized to generate income.
Fixed Assets Turnover
Ratio
Sales
Fixed Assets
Indicates the extent to
which the investment in
fixed assets contributes
towards sales.
Debtors Turnover ratio Credit Sales
Average Debtors
Reflects the efficiency with
which debts are turned into
cash
Creditors Turnover ratio Credit Purchase
Average creditors
Reflects the number of
times average dues to the
supplier is settled
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Working Capital Turnover
ratio
Sales
Net Working Capital
Ratio indicates whether or
not working capital has
been effectively utilized in
making sales
Profitability ratios=refers to business ability to generate earnings
Gross Profit ratio Gross Profit ( Sales- COGS) * 100
Sales
Measure to assess
production or Operational
efficiency
Net Profit ratio Net Profit (Profit after tax) * 100
Sales
Measure the efficiency of
the firm in managing
production, procurement,
sales, financing
Operating Profit Ratio Operating Profit * 100
Net sales
Indicates Operational
efficiency of management
as against the net profit
ratio
Expense ratio Expense * 100
Net Sales
Indicates the portion of
sales which is consumed by
various Operating expenses
Overall Profitability = Reflects earning capacity of business
Return on Investment PBITD * 100
Capital Employed
CE=Fixed Assets+ Working Capital
Profitability in terms of
total assets used to earn the
profit can be assessed
Return on Equity Profit after tax
Net Worth
Measure the efficiency of a
firm in managing its
shareholders fund
Earnings Per Share (EPS) Profit after Tax
Number of Shares Outstanding
Represents amount of profit
earned on per share basis
Valuation Ratios=Judges the value the stock market places on any given company
P/E Ratio Market Price
EPS
Shows How much the
investors are willing to pay
per rupee of reported profits
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Current Assets=Inventories, Bills receivables, prepaid expenses, Accrued Income, short term Loan &
Advances & Short term Provisions
Current Liabilities =Bank OD, Creditors, Short term provision like tax, dividend, Short term loans
Outstanding expenses
Long Term debt or Long term Liabilities =Debentures, Secured Loan, Long term Loan